Mike’s Tax Notes

I’ve been spouting off a bit lately on politics and I keep making the same arguments to people, one at a time, on Twitter and Facebook. I’m aggregating some of them here so I can point to it later.

First, I’ve recently said I won’t vote for a Republican again unless the candidate explicitly approves of gay rights and is pro choice.

That doesn’t mean I support all (or most, or even many) of the core beliefs of Democrats. I’m with them on the social rights stuff, and I’ve made it clear that those issues matter enough to me that I’ll hold my nose and vote for a Democrat, or not vote at all.

But this tax stuff is just ridiculous.

1. The Tax Base.

Wealthy Americans pay almost all the taxes in the U.S. Only about half of Americans pay federal income tax at all.

A lot more pay payroll and state and local taxes, but it’s a specious argument to say that it’s the same thing.

If you don’t know what specious means, look it up. Don’t just glance over it because it’s the core issue.

The federal budget is financed with debt and with the income tax. Payroll taxes are used to pay social security and unemployment.

When only a fraction of the population pays taxes democracy will break down. See “A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy.”

This isn’t revolutionary France, where the poor were incensed over being taxed. The argument now has assumed that only the wealthy pay the big taxes. The discussion is just that they should pay more.

2. The Rich Don’t Pay Enough.

This is a complicated argument that ends up boiling down to sound bites. Warren Buffett made it all worse by confusing all kinds of stuff.

I wrote about it here.

The super rich don’t pay much in taxes. But the sort of rich really get crushed. Mostly because the super rich and the poor/middle class team up to screw them bad.

People with relatively large incomes (think $500k or $1m/year) pay lots of taxes – 35% of their 2012 income, for example.

Everyone’s running around now saying that the rich don’t really pay that rate, though. Again, Warren Buffet really added fuel to this fire when he said he paid a lower rate than his secretary.

But that’s because he’s super rich. The super rich are super cool with higher taxes, because they don’t rely on income each year. They already have tons of money, so even a higher capital gains rate isn’t much of a bother. Just don’t say “wealth tax” to them, they’ll freak out fast if you do.

And there’s a huge gaping hole in the tax code that allows private equity types to take their income as capital gains, which usually means a 15% rate. This is the carried interest exception and it stinks.

That single exception allows people like Mitt Romney and Warren Buffet to pay a very low tax rate on massive amounts of income.

Buffet could have come out explicitly against just that, but instead he more generally said we need to tax the rich more.

When in fact the high income earners are already taxed way too high relative to everyone else.

That’s why people like me don’t bother with normal income any longer. The government takes too much of it, it’s not even worth earning.

I make almost all my money on carried interest via CrunchFund. And I’m telling you right now that it’s undertaxed. It should be taxed at normal income tax rates.

And I’m ok with it if the carried interest exemption goes away (as are lots of VCs who understand how odd it is).

Why? Because it’s more fair. And also because I have stored wealth, which the government can’t touch without implementing a wealth tax or through inflation. A wealth tax won’t happen any time soon. Inflation already is.

3. Inflation.

The biggest threat to my wealth is, simply, inflation. Inflation eats economies, kills wealth, and rewards debtors.

The biggest debtor is the U.S. government. Which is why they secretly don’t mind a little inflation.

The only way to pay the vast amount of debt we have is through inflation. It doesn’t matter if you close the carried interest exemption, or if you tax the high income types into the middle class. That might seem fair but it doesn’t solve the tens of trillions of dollars in unfunded liabilities we have as a country.

The only way to fix it, other than inflation, is to lower spending. And that means crushing entitlements. Even defense spending isn’t enough to make a real dent in things.

No matter what happens to the rich in this country, one thing is clear – entitlement programs as we know them are going to end. Either because we won’t be a functioning country any more, or because government will finally be forced to change them.

Update: Kill The Rich! It Feels Good!

86 thoughts on “Mike’s Tax Notes

  1. johnnymac532 says:

    There was just a spike in searches for “specious”. Good stuff.

  2. Mike, so would you be okay if your income were taxed based on income tax, and not the capital gains amount?

    You are correct, individuals with high income are in the highest tax bracket at 35% (and some avoid that by getting paid through dividends). However, are they using proportionally more government resources than someone who is taxed at 15-30% on their income?

    I’m in the same boat as you are when it comes to republicans/democrats. I agree with republican fiscal and tax policy, but abhor their social stances (women rights, gay rights, etc). Socially democrat, fiscally republican.

    • Matt says:

      Is that fiscally Republican platform or fiscally Republican actions?

      Since as far as I can tell the platform stance of responsibility and the actual actions in congress don’t have any relation anymore. Which makes a mockery of the entire platform when it’s all talking points and no actual follow through.

      I’ve given up on them and it saddens me.

    • Drew says:

      However, are they using proportionally more government resources than someone who is taxed at 15-30%

      How do you figure that ???

      Since its all really a current accounts budget, and Entitlements are the most underfunded, then those taxed minimally at 15 – 30% like just payroll taxes, then the low taxed are using a higher proportion of government resources because there are many more minimally taxed than high taxed individuals.

    • It’s amazing how successful the Left in general and mainstream has been in controlling the narrative and language for, well, forever (of course, virtual monopolies in the “education” system, Hollywood and, to a lesser but still gigantic effect, the media certainly don’t hurt). It’s become common knowledge that Republicans are “against” gay and women’s “rights.” Everything is a “right” today.

      And though I sincerely commend you for these past couple posts on this subject, it is tremendously disheartening to see your continued aversion and principled stance against Republicans due to differences on social issues—single-issue votership. What’s more damaging: gay couples not being able to “marry” (the status quo and COMPLETE non-issue the prior decades), or the myriad of consequences (A-Z) that stem from the Left’s deceiving class warfare and economic ills at large?

  3. JoMo says:

    Great post and I think you’re pretty much 100% right on the tax topic. You should sync up with Robb Wolf and Dave Duley’s Podcast (http://www.icanfixamerica.com/podcasts/) I have a feeling you three would hit it off.

  4. I understand your point that paying federal income taxes is important but you have to look at why so many people pay no federal income tax. First there’s the people making VERY VERY little, which I think everyone can agree should have no federal income tax liability. Second the majority of those people get to the zero tax liability level through deductions such as mortgage or child tax credits.

    Most importantly though is that these people are employed and earning wages. That means that they’re contributing to the GDP (which allows us to maintain our borrowing/debt levels). Add to that the fact that these people are spending the money they earn, they’re giving it to corporations or small businesses. This leads us to an argument about effective corporate tax rates, THAT’S a major problem. It’s far too easy for corporations in this country to avoid paying THEIR fair share, I’d say this might even be more pressing than saying the super rich aren’t paying their fair share.

    There are a lot of ways to solve our financial problems that don’t include massively gutting entitlements/safety net programs or raising taxes massively on any single class of Americans.

    Side note: Just to make things a little more complex let’s add to your tax base argument the issue of geography. I’m from Buffalo, NY. You’re from California. 150k here is “doing very well” while 150k in places like San Fran doesn’t go nearly as far, yet me here and someone there are paying the same federal tax rate while our effective buying power is significantly different. My point is these are complex problems that require extremely complex solutions.

    • Estonian says:

      Complex, or extremely complex situations can be, in fact, addressed with fairly simple solutions. I have read tons of articles about the US tax systems, some claiming that most Fortune 500 companies do not pay basically any tax at all … The easiest solution to this problem is flat rate tax.

      The problem with US tax system and others alike is that it has many (lobbied) exceptions and is very complex in nature and requires a lot of resources to be governed. A flat rate tax has few if any exceptions to the general rule – it treats all subjects the same way. The same system can help also the low income people by creating a tax free minimum – which applies to all regardless of the income group one is in.

      As I live in Estonia, I know how well this system works, and it is relatively easy to compare. You do not need an accountant or a lawyer to help you with taxes, and even if you do, it would not help you avoid anything. The system is so effective that Estonian government abolished income tax for businesses from re-invested profits, since the administration cost was higher than the tax revenue created through taxation.

      Because the system works so well, no other taxes on wealth and income are levied – meaning no property taxes, no wealth taxes etc.

      • tom1295 says:

        The problem in the US is not in determining what the rate is, it is determining what is taxable income. The complexity is in the ability to exclude income. The wealthy have immeasurably more ways to exclude income from taxation than people who work for a salary. Even those who make large salaries will generally pay more taxes than those who make money from investment.

    • Michael Calloway says:

      Everyone should pay at least 10% federal income tax. PERIOD. Warren Buffets pays 14% as Capital Gains Tax. But if the guy makes 50 million he is still supposed to pay $7,000,000.00 in federal taxes if he doesn’t fight it. $7 Million is a lot of taxes
      So both you and Mr. Buffet are at best playing word games when you switch between tax rate and tax dollars in the same breath. Pick one and stick to it.

      BTW – Berkshire Hathaway is still fighting a $ 1.2 Billion Federal Tax bill for the 2002 through 2004 tax periods. So he speaks with forked tongue at best…

    • John McCurdy says:

      No. Everybody needs to pay some income taxes if they have income. Even if it is only $100 a year. The only exception I would make is active duty military – they give more than enough with thier lives, life disruptions, and other sacrifices.

      • Brock says:

        John, I think your view that everybody needs to pay income taxes except active duty military is part of the problem. All groups think they are special and deserve tax credits. I mean no disrespect to our military; I do appreciate its service. However, many people contribute greatly to society, even with their lives. Farming, for instance, is one of the most under-appreciated, dangerous jobs around. Surely they too deserve an exemption, right? Surely we need food more than tanks and bombs.

        Then what about teachers, police officers, firefighters, engineers, garbage collectors, etc, etc, etc. There are many, many jobs out there that are vital to our nation. But we can’t continue to support a bloated, esoteric tax structure that we have now. Our debt ratio proves this. Therefore, we can’t just hand out “feel good” exemptions just to make ourselves feel patriotic.

        I think your first sentence is correct. Everybody who earns income should have to pay. NO EXCEPTIONS, PERIOD. The amount and degree can be debated.

      • tom1295 says:

        Ever seen the parking lot at a military post? A lot of BMW’s.

  5. Dan says:

    Well said. It is amazing to me that the U.S. hasn’t produced a candidate who is liberal on social issues and conservative on economic ones. But we seem to be locked into this 2 party system in which you pick the least bad candidate.

  6. Peter V says:

    You ask readers to focus solely on the income tax, which I guess is fine as an intellectual exercise, but then you proceed to talk about it like it is the only tax. I don’t think you made a sufficient argument to do that. The other taxes people pay are significant, and everything put together is a flattish tax. Why is that specious? Are you arguing that the rich should be paying a heck of a lot more into Social Security, sales tax, etc.? Sounds good to me.

    http://www.economist.com/blogs/democracyinamerica/2012/07/taxes-and-rich-0

    That said, I appreciate the straight talk!

    • Brock says:

      Remember that the people who pay income taxes pay that IN ADDITION TO the other taxes, not in place of them. So here we have a group of people that pay income taxes along with other taxes and another group that does not pay income taxes but pays other taxes. Not an equal effort.

  7. Joshua Hines says:

    Great read Mike. I find myself agreeing with you more and more. Since you mentioned inflation, I’d be curious to know what you think about The Federal Reserve and Ben Bernake…

  8. Micah says:

    35% is the top marginal rate. You can’t ignore the word marginal any more than you ask others not to ignore the word specious.

  9. kenny says:

    very good. thank you!

  10. Chad says:

    Social issues are usually non-issues to me during elections because even if the government legalized gay marriage tomorrow, half of the country would still be homophobic. Its only a matter of time before gay marriage is passed in all the states but the reason its a matter of time is because we need people to die – honestly, my grandparents are still racist towards African Americans. The government cannot change the way society accepts people.

    • Mcbeese says:

      Very true statement. Not said often enough.

    • tom1295 says:

      Actually the government can. One of the reasons the younger white population is more accepting of African Americans than your grandparents is that they were born after the passage of the legislation of the 60’s. In fact laws both reflect and shape out attitudes.

  11. Denny Sher says:

    IMO taxes are a symptom of a bigger problem; the lack of term limits on our legislators. It amazes me how Congress only has an 8% approval rating nationally, but 90% are re-elected. They “take care of their own” at the peril of the nation. A citizen legislature, where the elected official is virtually guaranteed to return to non elected employment, should be the battle cry for everyone upset with the current state of affairs.

  12. I think you raise a very good point regarding the “super rich” vs. the “sort-of rich”. The vast majority of the “super rich” that have been minted in the past 30 years have achieved such wealth almost explicitly through capital gains. In addition, the “super rich” have used this wealth to finance wealth-protection and tax-evasion projects such as offshoring, which are still prohibitively expensive to the “sort-of rich”. It’s the combination of these two things that have driven the huge income inequality gap in this country (which, if you really look at it, is really just the top 0.1% pulling away).

    More than “tax the rich” or “tax the poor”, we need someone to take up the rallying cry of tax reform. The tax system as it is now is broken. Apple and countless other companies have millions or billions held offshore because it would be too expensive to bring it home. GE actually got paid BACK money from the federal government because of their ability to manipulate the tax code. Wall Street and many other companies pay its executives with massive stock “bonuses” that can be taxed via capital gains instead of income. This is all backwards and broken. I don’t care who takes up the issue, Democrat or Republican, but someone needs to.

  13. Great post Mike. I think you raise a very good point regarding the “super rich” vs. the “sort-of rich”. I think there’s a big difference between the two.

    For starters, the majority of the “super rich” that have been minted in the past 30 years have achieved such wealth almost explicitly through capital gains. In addition, the “super rich” have used this wealth to finance wealth-protection and tax-evasion projects such as offshoring, which are still prohibitively expensive to the “sort-of rich”. It’s the combination of these two things that have driven the huge income inequality gap in this country (which, if you really look at it, is really just the top 0.1% or “super rich” pulling away).

    More than “tax the rich” or “tax the poor”, we need someone to take up the rallying cry of tax reform. The tax system as it is now is broken. Apple and countless other companies have millions or billions held offshore because it would be too expensive to bring it home. GE actually got paid BACK money from the federal government because of their ability to manipulate the tax code. Wall Street and many other companies pay its executives with massive stock “bonuses” that can be taxed via capital gains instead of income. This is all backwards and broken. I don’t care who takes up the issue, Democrat or Republican, but someone needs to.

  14. Mike it’s so frustrating how much I agree with you but we came up with diametrically opposed conclusions. Here’s the thing: the social stuff WILL FIX ITSELF EVENTUALLY.

    Yes it’s incredibly frustrating to hear assholes like Akin make moronic statements about gay rights and the like. But throughout history, social freedom has increased as old ignorance is knocked down. Most people our age or younger are fine with gay marriage. As the young people of today become the majority of tomorrow, social issues will continue to tend towards liberty.

    But if we don’t fix the financial mess we’re in, THIS COUNTRY WILL CEASE TO EXIST.

    Yes it sucks we have to pick one or the other, but please reconsider your moratorium on voting Republican. If anything you should refrain from voting Democrat UNLESS they support sane economic policy. The existence of our country depends on it.

    • Michael Arrington says:

      Toby, besides the fact that we don’t agree on the issue you bring up, I have to say this as well – Republicans haven’t done a damn thing to reign in spending, either. Which means they have almost nothing going for them at all in my book.

      • David Callahan says:

        … what about the 5 Trillion plus dollars that Obama has added to the national debt in about three and a half years in the White House? — Is that the Republicans fault too?
        You are correct on Republicans when it comes to runaway spending, however, if we truly think as educated adults, we MUST vote correctly [yes, many of us will hold our noses while we do so] and defeat Obama and his party.
        Not voting means that we will allow him to continue destroying the best country/society that ever existed. Just think about this.
        Gay marriage can be dealt with AFTER Romney becomes President…

  15. Basil says:

    What is it about the way Canada does things that wouldn’t work in the states? We have free health care, and if you compare your taxes plus the cost of your private health care, we have lower taxes in most provinces. We spend about a quarter what you do on defense (per capita), but that’s not enough to make up the difference.

    • Dennis954 says:

      The problem is that the US consumer subsidizes your drug costs in Canada. All the R&D costs are passed on in the form of higher prices to US consumers. Through the compulsory licensing laws in Canada, the drug innovators get far less patent protection. If the USA were to adopt Canada’s system, who would pay for the development of the new technologies in medicine. Secondly, Canada is a far less litigious society than the USA. Much of the higher cost of health care is high malpractice insurance premiums, and the large number of tests done in the name of CYA in case a patient decides to sue.

      • tom1295 says:

        Having a less litigious society is hardly Canada’s fault. In fact litigation reserves are part of the cost of drugs in the US too. Not just R&D and production. Another way to reduce costs would be to restrict consumer directed advertising of prescription drugs.

    • sbmmoxie says:

      Canada’s strategic defense plan relies heavily on United States military spending. The United State’s cannot rely on any ally the way the Canadians are able to rely on the U.S. This is the cost of hegemony.

  16. hany says:

    Arguments aside, using one of the biggest historical economic misquotes isn’t helpful.

    See: http://en.wikipedia.org/wiki/Alexander_Fraser_Tytler#Misquotation_-_Tytler_Cycle

  17. The income tax is only 27% of total goverment revenue (http://www.economist.com/blogs/democracyinamerica/2012/07/taxes-and-rich-0). Why is the argument, that people that do not pay that tax, but contribute to the rest of the 73% of revenue, specious?

  18. NA says:

    Gay Rights != Marriage

    I’m completely for gay rights but that doesn’t mean you need to support changing the definition of marriage.

  19. gavin says:

    And your decision to focus *only* on the income tax is highly specious. You’ll want to give this chart a closer look IMO.

  20. I think it’s a poor choice to say “entitlements” since that generally is taken to mean Social Security and Medicare together. Social Security is fully funded for the time being, and some minor tweaks could fix that permadently (getting rid of the cap for instance). Medicare costs are projected to rise to an unsustainable level (although there is evidence of the curve flattening recently).

    So the real problem is Medicare, and using the term entitlements is misleading.

  21. Mike, have you researched the history of poverty before LBJ’s Great Society? Before Social Security? I don’t know how you can be at once empathetic to those whose rights have been stomped upon by the state because of their gender or sexual orientation, while ignoring those whose rights have been stomped upon by the state because of the contents of their bank accounts. I think it would be fantastic if everyone who was currently paying no federal income taxes started making enough money annually to be bumped into a paying tax bracket. I’d imagine the vast majority of those currently in the “47%” (who are not elderly or disabled) would love the opportunity to make a bit more money, even if it meant their income was taxed. The problem is the opportunity just doesn’t exist for a vast swath of the American public. If you have thoughts or ideas for solutions to our endemic poverty problem, I’d love to hear them. But until then, Medicare, Medicaid, Social Security, and food stamps are absolutely necessary to keep Americans from dying in the streets. The fact that our politics reward politicians who ignore the true price tag for these safety nets and instead pay for them with debt may be the toughest nut to crack of all.

  22. scottf007 says:

    From Australia, I find it incredible how the US political and tax system work. It is honestly insane.

    We have progressive tax brackets, and it is pretty hard to get around these:

    Taxable income Tax on this income
    0 – $18,200 Nil
    $18,201 – $37,000 19c for each $1 over $18,200
    $37,001 – $80,000 $3,572 plus 32.5c for each $1 over $37,000
    $80,001 – $180,000 $17,547 plus 37c for each $1 over $80,000
    $180,001 and over $54,547 plus 45c for each $1 over $180,000

    Our minimum wage is say a cafe is about $18 / hour and we do not tip generally. If you invest capital gains under 1 year is 50%, and over 1 year is 23%. This enables the lower and middle class to build some wealth and contribute to society, while the upper class pays more tax. Our welfare and government assistance starts to cap out when you earn too much (I think the figure is something like $150K). We have free healthcare for everyone, but you can increase the quality for about $50-100 a month.

    We do not have people paying money to politicians in the same way they seem to in the US, buying policy and laws in their favour.

    The US is effectively bankrupt, deficits each year as big as our GDP. People do not run their lives like this, you can not run a country like this. It will come back and bite hard.

    FY 2007: $161 billion
    FY 2008: $459 billion
    FY 2009: $1,413 billion
    FY 2010: $1,293 billion
    FY 2011: $1,300 billion
    FY 2012*: $1,327 billion

    After 2008 it seemed no one was punished, the government has taken all the risk out of being a financial gambler and wiped the debts and the citizens are now responsible. You can not run an proper economy (or anything) without risk, that is fundamental in terms of risk/return, you take away risk, people do stupid things.

    To correct all this, people have to face facts that the old days are over, and need to run a surplus, pay down debt, build wealth in the lower and middle class (this generates money for everyone, and the wealthier will be much wealthier). They need to stop people treating the share market as a gambling platform, stop HFC, short selling (how pension funds can lend shares for short selling that erodes their value is another story). Stop money being such a large part of the US political system – it is insane that you want people to be impartial if you set up a system where they need lots of money to maintain their position, it invites corruption. The idea that you can buy legislation in your favour is wrong. In Australia we have lots of politicians who are just normal people, not extremely wealthy.

    The current model is broken, it has been broken for a long time. Einstein said the definition of insanity is doing the same thing over and over and expecting different results. The economists who are all rich, put your country in this mess and did not see it coming. Then they want to tell you how to get out of it. This needs a paradigm shift away from current policy and thought. Time for people to take a hit, suck it up and start again – their current methods are just going to ensure your children and their children will remain in a terrible place for a long time.

    Just my 2c worth

  23. Holy Smokes! says:

    You ain’t seen nuthin’ yet…

    From BusinessWeek: Boston University’s Laurence Kotlikoff calculated US unfunded liabilities at $211 Trillion.

    This means…
    * Number of US Households: 112,611,000
    * Unfunded liability per household: $1.87M
    * But the 1/2 of households that don’t pay taxes can’t contribute. So…
    * That’s $3.74M per tax-paying household!

    The big thing that gets lost in the shuffle is that unfunded liabilities are the Net Present Value of the shortfall.

    $3.74M is how much you owe today – right now – right this minute.

    So every day you don’t write that check, that obligation gets bigger and bigger.

    You can argue the validity of the number. Fine, use Mary Meeker’s $75 Trillion. Now you only need to write a check for $1.3M. TODAY!

    http://www.businessweek.com/magazine/why-the-debt-crisis-is-even-worse-than-you-think-07272011.html

  24. First of all, refreshing approach to this topic, without using class warfare rhetoric or referring to entire swaths of the public as parasites or takers.

    But here’s the problem with your argument: The same entitlements you propose we slash are funded by all those other taxes that you argue don’t count as relevant taxes.

    Your argument, near as I can tell, is that we as higher income earners are entirely backing an entitlement system that we can’t afford which also has the side effect of deteriorating our wealth. But entitlements are broadly funded by the entire population. In fact the rich and kinda-rich are shielded from paying for them.

    Let’s break this down. The big ticket entitlements are Social Security, Medicare, Medicaid, and unemployment.

    Social Security and Medicare: Paid for through payroll taxes and by self-employed earners up to the first $90k of their income.

    Medicaid: Largely paid for through state taxes.

    Unemployment: Payroll and state taxes.

    So that leaves about 80-85% of the country paying for entitlements at roughly the same level. The remainder of the population are elderly (who paid into the system through a lifetime of working and paying taxes) or too disabled to work or temporarily without work and will pay taxes again in the future. At most we have 1 or 2% who are receiving entitlements that they never paid for. If our error rate is only 2%, I’m fine with that.

  25. Hobart16 says:

    Great to see civil discourse on an important topic. There are some important facts and concepts left out that I hope will add to the discussion.

    First, the US cannot possibly go bankrupt unless it chooses to, as Russia did in the 90s. All the debts are denominated in dollars which we create in an inexhaustible supply. The US dollar is the worlds reserve currency so if you want oil, cotton, copper and some other commodities, these markets are all dollar denominated world wide. This creates a large demand for dollars and gives us a lot of flexibility. It is critical amd messing with the debt ceiling imperils this exhaulted status and is totally idiotic. Again, it’s critical to understand that we have promised to pay everyone in something that we have a monopoly on and can create out of thin air. We are not revenue constrained like a household. The one and only issue to worry about is inflation. That is the constraint.

    Second, who holds most of the US debt? We do! Out of about 15T as of a few months ago, the US government has intra governmental transfers of 5T (social security trust fund, Medicare trust fund, etc). Another 7T is owned by States, pension funds, and US residents. China and Japan have a trillion each or so. Incidentall, the Chinese have been net sellers of bonds since July 2011. They have dropped holdings from 1.18t to 1.1t, or 800 million. What has happened without the achinese buying bonds? Prices have gone up! Many people have wrongly claimed the Chinese are financing us and we are beholden totem. Wrong? They are in a bind as they need to buy bonds to keep the yuan low so they can export goods cheaply. We have them cornered by being the reserve currency and they are fighting this. We can export inflation to them and we are in fact doing so by printing and devaluing our currency. The 1.1t we owe them is dropping in value every day and they are dealing with inflation over which we have control. Debt service is in ok shape as older bonds are bought up and newer issues at lower rates are substituted. The low interest rates (approaching zero) are substituting for 30 year treasuries from the 80s that paid 15% Currently demand and prices for US treasury bonds are at all time highs. Bid to cover ratios at treaury auctions are very strong.

    Third, you left out that in addition to social security and unemployment, wage earners are also paying for Medicare. Between Social Security and Medicare and unemployment, that is about 30% of the entire federal budget. Of course the contributions to these federal taxes are capped at 106k. So people working for that amount or less pay about one third of the annual budget. Let’s not forget that these working people have paid these amounts for 76 years and never added one single dime to the deficit. Not sure why you say this is specious or less important than income tax. Other than military related spending of about 45% of the budget, ss and Medicare are the second biggest federal expenditures. Far from specious. If you are a trust fund baby or living off dividends or hedge fund income you do not pay payroll taxes on that. So you contribute Nothing to these huge federal programs.

    Fourth, if you look at the reason income taxes are down (revenues are at Korean war era level) it is due in part to republican strategy of putting more tax credits into the system rather than government programs and because corporate, estate and dividend tax rates are at all time lows. So instead of people going for welfare the conservatives figured it would be better to let poorer people just keep the tax money as a credit. In other words, the republican years, not democrat, resulted in no decreases in spending, but steep decreases in tax revenues coming in. Obama continued the bushes tax cuts. He has also not increased federal spending at all from the last year of the Bush administration. Now that last year of Bush was much higher than the first 7 so when Obama supporters say he hasn’t raised spending it is technically true but only as to the last year of Bush. Kind of weird how thismhas all happened and how misinformed people are. The congressional budget office is a great resource.

    Cheers.

    • Mike, have you seen this: http://ElevatedFinancialPlanning.com ? Very important my friend. I’ve not seen this information better articulated and more thoroughly consolidated anywhere else. Commodity #1 is ‘information’ and this information is worth its equivalent in gold 3 years from now. See for yourself.

    • whodatperson1 says:

      Hobart, while technically correct about bankruptcy in your first sentence, the rest of it falls on it’s face. First of all, the US is QUICKLY being set a side by other nations as a non-factor in trading currency. That means the rest of your entry is pretty much debunked.

      Secondly, by continuing to run the printing presses constantly, we don’t need to worry about bankruptcy so much, but massive inflation. Then lowering the interest rates to almost nothing is almost as moronic. Ask the Japanese. More and more people are opting out of the banking system right now. Less people… less money… less investment. Less savings. Bigtime problems. Many people are receiving less than .05c on a dollar in a ‘savings’ account, so they’re sticking it under their pillows, in coffee cans and such…

      Does that sound anything familiar to the 30’s? 1930’s that is!

      Unemployment is actually around 15%+ if you factor in the amount of people off rolls now. Expecting THOSE jobless people to spend more money, and / or relying on the remaining people with less money in their pockets to spend more is not only moronic, but completely DELUSIONAL.

      QE3 is nothing but relying on the same source that got you into the problem in the first place. Buying mortgages at 40B a whack is plain idiotic on Berwankee and Obama’s part. Purely stupid.

      Third…. neither the Repucklican’s or Democraps are going to take care of the problem. Each side is fraught with problems on the surface.

      Lastly, if in the 80’s the spending was DECREASED while the taxes were decreased, there wouldn’t be any issues. The Congress was completely controlled by Democraps then. The big picture is this:

      It’s no different than a person’s own household budget. You have x dollars, don’t spend over x dollars. Do not spend Y dollars because it’s more than you have. It’s really simple. Really logical, but really hard to do when every Tom, Dick, Harry and Jane wants a piece of the pie and wants Govt. to take care of them from cradle to grave. I want my healthcare. I want my SSI. I want my dog’s vaccination covered. I want, I want. I want.

  26. Ram says:

    A few salient points: 1) Buffett doesn’t get paid carried interest. His personal income is primarily dividends. 2) The VC and PE industries have been aggressive in protecting carried interest taxation with Schwartzman comparing trying to change it to being a Nazi. 3) If you believe so strongly in inflation, we are in a tremendous negative interest rate environment.

  27. “Entitlements” aka stuff they paid into that rich guys like you don’t have to worry about but they do. Not everyone has the easy glide path.

  28. Katja Bell says:

    What do you mean, cutting defense is not going to change things? The total defense budget for 2013 is USD 613 billion (http://comptroller.defense.gov/defbudget/fy2013/FY2013_Budget_Request_Overview_Book.pdf). The total federal budget for 2013 is USD 3,803 billion (http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/budget.pdf). So, defense is 16% of the national budget.

    By comparison, Germany’s defense budget for 2013 is EUR 33.3 billion (http://www.bundesfinanzministerium.de/Content/DE/Monatsberichte/2012/07/Inhalte/Kapitel-3-Analysen/3-1-regierungsentwurf-bundeshaushalt-2013-und-Finanzplan-2016.html) and the overall federal budget is EUR 302 billion (http://www.bundesfinanzministerium.de/Web/DE/Themen/Oeffentliche_Finanzen/Bundeshaushalt/Bundeshaushalt_2013/bundeshaushalt_2013.html). That’s 11% of the national budget. The UK’s defense budget is GBP 39 (http://cdn.hm-treasury.gov.uk/budget2012_executive_summary.pdf) with public expenditure being GBP 647 billion (http://cdn.hm-treasury.gov.uk/budget2012_complete.pdf). That’s 6% of the overall budget.

    It seems to me that the US government can easily cut its defense budget by USD 100-150 billion and still have a higher percentage than its allies in Europe.

    • Michael Arrington says:

      see http://s3.amazonaws.com/kpcbweb/files/USA_Inc.pdf

      slides on pages 65, 174 and 213-214. Especially 213-214. $47 trillion. We’re fucked. completely hosed.

      • whodatperson1 says:

        Entitlements are always the problem. Lifetime wide, generational entitlements are the bane of societies. They are historically unsustainable. The Europeans are seeing it unfold before their eyes and we have a birdseye view from across the pond. People not taking care of themselves, but relying on govt. to sustain them will always be a problem.

        • Katja Bell says:

          Not all of this is true.

          Case in point: healthcare. If you make everyone pay into it, then there are no more freeloaders. Right now the freeloaders go to the ER (which you pay for with your tax dollars). If they were forced to get insurance, they would pay at least some of it, which is more than what they pay now.

          Also, if you look at statistics you will see that many people move in and out of the entitlement system. I agree that there are freeloaders. But many probably just use it for a little while until they find a new job.

  29. Sal says:

    Hell, it crushes anyone who is single and rents and makes a decent income +75k.

  30. jamesa says:

    I agree with your post in general, but this is just wrong:
    “A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury.”

    It is a simple matter of fact that there have been plenty of long lasting democracies that have demonstrated more collective responsibility that the US has been able to. Don’t fall into the trap of thinking that just because the US can’t balance its budget, nobody can. It’s patently false (see, for example, Australia, which has a lower tax rate as a % of GDP, better services, and a balanced federal Govt budget over the course of the economic cycle).

  31. nunya says:

    “The super rich don’t pay much in taxes.”

    This is a statement I disagree with and is widely bantered about. The amount they pay in real dollar terms .. not % terms is huge. When looking at them as individuals, Many pay lifetime(s) worth of taxes in one year. They pay a lot in taxes just not a large % of yearly income. There is a HUGE difference between those statements. To honestly approach the issues of “fairness”, this should be highlighted.
    Should they shoulder a larger burden? .. That is a separate issue that can be argued.

  32. choodak says:

    500k -1mm pay 35% rate. cry me a river. you can move to another country that offers you what this one does and has lower rates.

    • Michael Arrington says:

      no you can’t, because the U.S. is one of the only countries in the world to tax worldwide income of its citizens. The only way out is to give up your citizenship. Which an increasing number of wealthy people are doing.

      • Katja Bell says:

        This worldwide income thing is a really stupid law and should be changed. You should only pay taxes in the country in which you live, end of story.

  33. Mike says:

    I agree. In my business even at Class C Corp rates, pays over $110K a year in taxes on a $450K gross income. That is almost 25% after deductions. The penalty for being a small business owner is that we are in that saddle between the hourly employee’s on the down side and the big time CEO on the upside. Sometimes I wonder if classifying Class C corps is a wise thing to do when setting up small business corporations. Now we will have to fund mandatory healthcare benefits even though most employee’s are not going to be able to afford their share of the premium. So more pressure will be placed on the business owners if we don’t remove Obamacare.

  34. Barry says:

    I am assuming you are in favor of property rights. If so, then your views are inconsistent. Our most fundamental property right is the right to our own body. If you are pro-choice, then you are against this most fundamental property right. When people have conflicting property rights, some comparison must be made between the 2 sets of claims. If you compare the “most fundamental property right” to the responsibilities of pregnancy, you will see how ridiculous the pro-life position is.

  35. ro258 says:

    Why do we always talk about the % of income tax paid? Shouldn’t we really focus on how many $$ someone pays in tax? To really be fair the tax rate % should probably be declining as your income increases. Here is my reasoning, if I make $5M per year, and pay 15% in federal income tax (if it is W-2 income the rate would obviously be much higher), I contribute $750K annually to the government. In order to make that $5M per year, I have most likely (at some point in my life) have taken a massive amount of risk, built or done something that created jobs, inspired others thru my innovations, etc., etc. Compare that to someone that does not take the kind of risks that create jobs and foster innovation and growth. Let’s say that person makes $50K per year, and pays 15% in federal income tax. They contribute $7,500 annually to the government. Is that a fair and equitable system? I think it is not. Should the person that avoids risks, only thinks of themselves, uses the same infrastructure, drives on the same streets, votes, etc., be awarded by only paying 1% of the tax that I paid? That is the % we should be focused on. The tax % should absolutely decline as income increases.

    I realize I am using an extreme example, and just because you are not an entrepreneur does not mean you are only thinking of yourself. But shouldn’t we ask everyone who is an American to pay at least some federal tax? Shouldn’t there be a minimum annual fee for living in our great Country? Shouldn’t our tax system reward those who take risks to build jobs and foster innovation? We should create a tax system that motivates and rewards those who engage in activities that drive value into our economy.

  36. Another Capitalist Oppressor says:

    I would give my left nut for a carried interest exemption up here in Canada, where my income tax rate is 49.5% and even if I take out my income as dividends from my company, I’m still paying close to that in double taxation.

    When the day finally comes when I sell this company I’m moving to the Caymans and never paying income tax again, not to mention I’ll never start another business in Canada.

    I guess that makes me some super-rich asshole who’s part of the problem (taxable income between $400-$600K with 80% of my net worth tied up in my business which is worth a few mill.) only paying a couple hundred grand in personal taxes as opposed to MY FAIR SHARE of the tax burden … lol

    (Yeah yeah, I know, I drive don’t I? Use roads? I get free medical care don’t I? – DON’T GET ME STARTED)

  37. Ian Callum says:

    Allowing the Bush tax cuts to expire would go a long way toward making extremely wealthy people pay more in taxes. It would also help balance the federal budget. The downside is that it would cause a recession. It still might be worth accepting this price in order to have the long term benefits of a stable national fisc. The best thing about this approach is that it requires no action by the Congress, which is all we’re likely to get.

    • Michael Arrington says:

      why do people think higher taxes can somehow make a dent in the unfunded liabilities we’re facing? I think some people are still thinking that everythings just a little off balance and can quickly be fixed. It can’t.

      • Ian Callum says:

        Collecting more in taxes would help cut the deficit. It wouldn’t solve the problem, since the biggest cause of deficit problems is growth in the cost of health care in the US. There are a number of ways to address this, but they are generally politically unpalatable. My expectation is that Congress and the executive will do absolutely nothing to address this problem, so the only progress to be made is from sequestration and expiration of prior tax policies. Sequestration actually would contribute quite a bit to solving fiscal problems, as it cuts baseline spending.

  38. i wonder why BI reports this kind of blogs
    If you haven’t realized that yet
    only LOSERS vote democrat they need the nanny state because they can’t do it on their own.
    for proof look at who votes democrat
    mostly special interest groups, bought and paid for with the taxes imposed on people who create REAL value added in the economy

  39. whodatperson1 says:

    I don’t believe in income taxes, so I’m probably different than most people on this board.

    My first question is this: Since you don’t like taxes, can we do the same for healthcare, social insecurity, medicare and such? Why should I have to fork over my money for your health problems? Should I have to pay for your viagra? What about someone else’s sex change ops? What about your 50 minutes in theraphy each week?

    Also, I wonder if your socially ok with poly, incest and diddling kiddo’s? Please… before you say I’m crackers do some research on all 3 of them! Those are coming and being pushed right now in courts, on television shows and by people inside the APA. By the way, it’s the APA that said homosexuality was a ‘normal’ sexual deviation right? So, what conservatives have been saying for quite some time is coming to fruition.

    Once homosexual ‘marriage’ is approved, which it still isn’t, the next domino would be poly and incest.

    If it’s good for one, it better be ok for the others. Also, there’s quite a movement for sex with children as young as 8 or 9. Is that ok too?

    I think a great move would be to get rid of the IRS and income taxes. No ‘rebates’ for being married which is a govt. way of control. Once that is done, then there wouldn’t be any homosexual or otherwise ‘marriages’ since the govt. wouldn’t be in the marriage business. Also, no SSI means there’s no need to fight over supposed benefits and allow you to give your money to whom you please.

    No? Why not?

  40. jsk dude says:

    gay rights? mike you are a fag.

  41. Katja Bell says:

    Alright, whodatperson1 (if that’s even your real name ;-)), here’s a question for you: How the heck do you go from homosexuality to incest? One has nothing to do with the other. Most incest probably happens between a female child and a male relative, but I would need to check the data on that. My argument is this: 1) you can have sex with anyone as long as it’s consensual (which it isn’t in the case of children, or in the case of animals), and 2) it is nobody’s business who you have sex with (as long as it’s consensual).

    The argument about tax breaks for (married) couples is an interesting one and certainly worth having a debate about. The people most screwed are single people it seems, since married couples tend to get more advantages. So, no tax breaks for anyone? There were some models done in Germany, where it was suggested that everyone pay 25% of their income in tax; no breaks, no advantages, just everyone’s fair share.

    Let me ask another question: if you get rid of income tax altogether, who is going to pay for roads, bridges, emergency services, teachers, etc? What about the military?

  42. Mark Hall says:

    I’d make two points here:

    1. The percentage of percentage of taxes paid neatly tracks overall share of income when you look at ALL taxes paid (as many commenters have pointed out). From the Wall Street Journal:

    http://online.wsj.com/article/SB10001424052702304356604577338122267919032.html

    2. The reason so many Americans don’t pay Federal income tax is because of policies (Earned Income Tax Credit) started, and expanded, by Republican presidents (Ford, then Reagan, the Bush II) for the most part. For the record.

    3. You’re right to be worried about unfunded liabilities; a lot of that is based on assumptions that health care costs will continue to rise, and compounded by fact we’ll have a big increase in retirees. So focus has to be on reducing health care costs.

    And Obamacare, if you’re fair and objective (and don’t parrot right wing talking points) has lots of stuff in it that begins to address these costs. Lots of efforts to push us away from the fee-for-service model. And as Obama himself has said, there is a lot more to be done.

    Unfortunately, some of his modest suggestions in Obamacare that tried to begin an honest discussion on reducing costs particularly for seniors got labeled “death panels” by Republicans. Mitch McConnell, Sarah Palin, and even Paul Ryan. They all demagogued that issue in 2010, scaring the hell out of seniors.

    So, if to be even handed and attack the demagogues on all sides, worth delving into that.

  43. Chuck E. Conqueso says:

    You didn’t build that – the troops you sent to Iraq to protect capitalism helped you. Now you don’t want to pay the bill, or take care of the troops. Gutless turds.

  44. “Wealthy Americans pay almost all the taxes in the U.S. Only about half of Americans pay federal income tax at all.”

    This is one of those great literally-true-but-very-misleading Rovian figures. It includes people/households that aren’t reasonably expected to be income earners — most significantly, millions of retired elderly and disabled who live on Social Security. Another category is millions of college and graduate students, who are each “households” for tax purposes and earn either zero or below-poverty-line income from part-time teaching assistant work, etc.

    Get the denominator right (households in which at least one healthy 18-to-65 adult resides who is not a full-time student) and we can have a good discussion about the rest. All I know is that as an upper-middle-income earner (almost all from work, not investments), I’ve paid a hell of a lot higher effective tax rate than Mitt Romney, year after year, throughout my entire career. I would jump for joy at the thought of paying only 13% to the feds.

    • Michael Arrington says:

      my last post (linked early on in this post) was written just for you. You’re the guy everyone else, including the ultra wealthy, are teaming up on to crush.

  45. Joan Doe says:

    Obviously, what we need is a Maximum Wage and a cap on wealth. It is impossible for anyone to work 1,000,000 times harder than anyone else, or be 1,000,000 times smarter, etc. etc. etc. Some individuals could be 1,000,000 times greedier, I grant you that.

  46. Dave Wainwright says:

    Why are the “rich” defined as people who “make” money and not people who “have” money? In the world of Apple, Microsoft, and Google, why do we have an antiquated progressive income tax? Presently, the wealthy own Tax Free bonds where none of that income is taxed. The Municipal bond market is about $3.7 trillion. Do the math.
    Then there are mortgage, charitible, depreciation, amortization, intangible drilling, and numerous business deductions. Dump the income tax, the 1040, all deductions and have a national consumption tax as written in the proposed Far Tax legislation. Yes, it exempts all income below the poverty line by providing a monthly prebate. It’s bipartisan except for the politicians who want to hold onto the power. IMHO

  47. I approach our tax challenge with a single observation. If the productive deployment of capital is the driver of growth and prosperity (which I perceive to be the central tenet of capitalism), why are our tax policies structurally skewed to subsidize returns on unproductive capital? Why do we think subsidizing the after-tax returns of unproductive capital will stimulate more productive investment?

    I believe if one ponders that question it leads to an obvious need for structural tax reform – and the answer is not a move to more regressive consumption taxes. I offer links to two pieces I’ve authored on the topic –
    Stimulating Job Creation at http://www.2pctsolution.com/?p=719 and
    an article ariginally published by Tax Notes and posted online at http://www.2pctsolution.com/wp-content/uploads/2012/06/Factual-Distortions-Derail-Productive-Debate-TA6-18-12.pdf

  48. You write that “Payroll taxes are used to pay social security and unemployment.” I respectfully suggest that you drank their cool-aid and bought into one of the deliberate factual distortions that obstructs productive debate. Federal Trust funds are an illusion. Excess payroll tax “contributions” have been consumed as general revenues. See Social Security: Trust? Or Ponzi Scheme? at http://www.2pctsolution.com/?p=542

    As for inflation, often described as a tax on wealth, it is a penalty imposed on holders of financial assets, but it is not a tax – at least not in the sense of funds that flow through the Treasury to support the workings of governemnt and costs of society. A grand bargain between sound money and higher taxes on accumulated wealth may offer the best argument there is for a balanced budget and fiscal sanity. See Inflation or Taxes? at http://www.2pctsolution.com/?p=726

    • Tom says:

      You may be correct that the payroll taxes have been used as general revenues. What you are admitting with that statement is that the collection of general revenues has been too low for the last 30 or so years. The trust funds are not broke if the government collects sufficient general revenues (i.e. income taxes) to pay them back. Since Reagan, income taxes have been too low to support the government. This is true regardless of whether one thinks the government should be larger or smaller. Not enough revenue has been collected.

      • Absolutely true that not enough revenue has been collected.

        But pretending that the Trusts are meaningful if the government collects sufficient revenues ignores the damage being done by the misrepresentation. Employment taxes are general revenues. The only functional purpose of pretending otherwise is to 1) hide the fact that the working class pays higher marginal tax rates than the wealthy, and 2) shelter our investment class and high earnigns from contributing toward what will soon be over 50% of our federal disbursements.

        It is a damaging, willful misrepresentation that derails productive debate. It is the basis upon which much of our population believes that Romney’s 47% allegation is true. The first step toward a productive debate is to reframe the issue on the facts. One key fact is – payroll contributions, are general tax revenues.

        • tom1295 says:

          Actually I think you and I are in general agreement. Yes the employment taxes are terribly regressive. How do you correct that? One way would be to do away with them entirely and just have an income tax. If the US was a civilized country that felt it only humane to take care of it’s elderly then income taxes would have to be generated in large enough numbers to take care of them. In a related matter, every Canadian I have ever met tells me that they gladly pay a portion of their income taxes to pay for their medical system. What is questionable at times seems to be whether the US is a civilized humane country.

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